When to Hire a Financial Advisor

Robo-advisors, which use complex algorithms to calculate an investor’s risk tolerance and then manage a portfolio more cheaply than human advisors, have garnered significant attention since emerging in 2013.

But, in reality, robo advice is part of a larger tech trend in money management that began with self-directed trading in the 1990s.

What all these offerings have in common is low fees—robo-advisors generally skim less than 1% of the value of assets under management, in line with the rates human advisors charge their richest clients. Self-directed traders, meanwhile, avoid those costs, but do pay brokerage commissions that are discounted from what a broker would charge to transact on an exchange.

Investors using either option still pay management fees for the mutual or exchange-traded funds (ETFs) placed in their portfolios. That money pays the asset managers and also covers things like the fund’s access to stock exchanges, such as the Toronto Stock Exchange and the New York Stock Exchange.

These fintech offerings even let users construct their own index funds and ETFs without having to pay management fees, and allow purchase of stocks on a fractional basis (which helps people own a piece of Alphabet—Google’s parent company—or Apple even if they can’t afford the steep price of a full share).

Robo advice platforms even perform periodic rebalancing to keep a portfolio in line with the investor’s risk profile and personal suitability—a task once considered the key reason for hiring a competent, human financial manager.

All of which begs the question, why work with a flesh-and-blood financial advisor? There are plenty of good reasons to do so, and they’re closely linked to an investor’s life stage, income level, and assets.

Younger investors—people under 40 with close to 30 years until retirement—probably don’t need to hire an advisor, unless they’re keen to work directly with an aggressive stock picker or have health issues requiring placement of specialized insurance. Inheritors of significant wealth and owners of successful businesses, of any age, also should hire financial professionals to ensure they take advantage of the myriad preferential tax treatments for all their assets.

But people only concerned with gathering assets in portfolios that account for their risk tolerances can likely stick with fintech options. The exception would be someone so fearful of risk that they over-concentrate their capital in safe investments that provide little return; those people need an advisor to help guide their investments to ensure returns ultimately meet future financial needs.

That last part is critical because the need for an advisor is largely a condition of age. When life gets complicated, or expensive, human advisors become important.

Statistics from a 2014 survey by Advocis, which promotes the interests of advisors in Canada, says roughly 12 million households in this country work with one or more financial advisors. And that same survey suggests a majority of clients seek out advisors when their financial lives become complex.

Investors who own more than one property, have assets in the United States or abroad, want to gift shares of a corporation, or need guidance on how to gain tax advantages from stock shares that have become worthless, need to work with advisors. Not necessarily because that advisor can solve all of those problems, but because advisors are relationship managers—just as they build strong relationships with their clients, they also make connections with professionals who can enhance their advice offering.

A well-networked financial planner can connect a client who’s considering divorce with a first-tier family law lawyer—and can then walk that client through what his/her finances will look like once he/she separates, and if he/she does in fact later divorce.

What’s more, clients with complicated holdings beyond their investments—trust funds from parents or grandparents, or shares in a company they own and want to eventually distribute to children—need advisors who are capable of mapping their entire wealth picture.

Lastly, real-life advisors are best qualified to help people plan the ends of their own lives. It’s most important to talk with an advisor when deciding who will benefit from wealth that will be passed on—be it children, a spouse, or a charity. The majority of advisors are planners first and so are well positioned to help people establish goals for their money—whether they’re around to spend it, or not.

The 2016 Digital Money Trends Report from Ratehub.ca looked at how Canadians interact with products like mortgages, and credit cards. It also examined how Canadians stay loyal to their financial institutions and how they use technology … Read More